Home inFocus Ideas for a New Congress (Winter 2015) Energy Security Policy: An Opportunity Awaits

Energy Security Policy: An Opportunity Awaits

Gene Gurevich Winter 2015

Energy is certain to be among the top priorities for policymakers when the 114th Congress convenes in January. With the House and the Senate under Republican control and President Obama seeking to leave a legacy achievement, an opportunity exists to accomplish something substantive on energy policy.

To move forward, however, it is necessary to break the decades-old stalemate on energy issues in Washington. Old habits die hard, but an end must come to the tug-of-war between the left, which has sought to undermine production of hydrocarbons, focusing primarily on promoting renewables and the environment, and the right, which has considered the production of hydrocarbons to be the only way to achieve American energy security.

This effort must not be framed as some mythical compromise between divergent political camps, only to have policymakers fall back into the trap of endorsing the familiar “all of the above” strategy while in reality supporting everything except what the other side views as important. Rather, a deal must be based on a common set of objectives, even if the means of reaching these objectives requires a compromise. Strengthening our national and economic security, a truly bipartisan challenge, can serve as a basis for such an agreement.

The Dominance of Oil

Oil sits at the intersection of U.S. national and economic security. The U.S. is the world’s largest oil consumer, accounting for one-fifth of total global consumption — about 19 million barrels — each day. Overall, petroleum fuels account for 37 percent of U.S. primary energy demand, more than any other fuel, and transportation accounts for 70 percent of total U.S. oil demand. Most alarming, however, is the fact that petroleum fuels power 92 percent of our nation’s transportation system — the engine of the American economy. No other segment of the American energy economy suffers from such a complete lack of fuel diversity.

Oil’s monopoly over our cars and trucks severely undermines our economic prosperity. When the price of oil goes up, our economy suffers. In 2013, the average household spent a near-record $2,611 on gasoline (current dollars). In 2002, the average was just $1,235. This nearly 120 percent increase in spending acted essentially as a tax on every U.S. family. Moreover, a recent study even estimated that high oil prices added $1.2 trillion to the U.S. federal debt between 2002 and 2012. It should come as no surprise, then, that every U.S. economic recession in the past forty years has been preceded by, or coincided with, an oil price spike.

The extreme importance of oil to our economy — and our utter vulnerability to oil price spikes and supply disruptions —brings with it severe national security challenges. Oil dependence distorts overseas priorities and limits policy options when dealing with our allies or enemies. Most apparently, America’s dependence on oil often forces us to accommodate major oil-producing countries with which we share little in terms of values or interests.

The case of Iran and efforts to prevent its leadership from acquiring nuclear weapons capabilities serves to illustrate this vulnerability. For years, the West delayed strong economic sanctions targeting the country’s oil sector, in large part due to fears that taking Iranian oil from the market would trigger price spikes at a time when spare production capacity was already tight. Only in recent years, after the U.S. production boom and other factors loosened the global oil market, were tougher sanctions finally imposed. Had the U.S. and its allies not been so terribly dependent on oil, allowing stronger resolve in imposing crippling sanctions against Iran much earlier, the situation today could be much different.

A False Sense of Security

The recent surge in American oil production has generated significant economic benefits. High oil prices triggered investment in and use of hydraulic fracturing and horizontal drilling techniques to extract unconventional oil resources. U.S. production of liquid fuels has grown 73 percent since 2005 and “tight” oil production in Colorado, North Dakota, New Mexico and Texas has accounted for over 90 percent of the increase. These developments have established the United States as the largest producer of liquid petroleum fuels globally, increased stability in the oil market, created thousands of jobs, and improved the balance of trade.

However, the benefits of the U.S. oil boom and the recent drop in oil prices to their lowest levels in years must not lull policymakers and the public into a false sense of security. This need for wariness is rooted in the fact that oil is priced on a global market subject to events beyond our control. As the world’s largest oil consumer, the U.S. remains dangerously vulnerable to oil price volatility. Even if the U.S. were to be completely self-sufficient through expanded production, the price of oil (and the price at the pump), would remain beholden to events affecting the global oil market. Unless there is a significant reduction in U.S. oil dependence, regardless of the oil’s origins, we will never be “independent” of that market.

Factors affecting the price of oil, whether produced in Texas, Saudi Arabia, or Venezuela, include global economic trends, such as increased demand in developing countries, weather events, and instability in major oil producing countries such as Iraq, Libya, or Nigeria that can trigger supply disruptions and subsequent oil price spikes.

It is hard to imagine low and stable oil prices in the long term when global demand is set to grow between 20 and 30 percent through 2035, as China, India, and other emerging economies become increasingly thirsty. Additionally, with rampant instability and conflict in major oil-producing regions, including the Middle East and North Africa, a major oil supply disruption, or a series of them, doesn’t seem like a farfetched notion. In fact, terrorist attacks on global oil and gas facilities are on the rise, as al-Qaeda and other extremist groups have refocused on energy infrastructure. Many of these terrorist groups are funded by oil money, the Islamic State and al-Qaeda in particular.

Moreover, the global oil market is not a free market. Members of the Organization of the Petroleum Exporting Countries (OPEC) and other nationally owned oil companies manipulate global prices to maintain market share or government spending requirements, often operating as revenue generators to fund military, social, and unconventional weapons programs. OPEC acts as a cartel, controlling global oil supplies in order to achieve an intended price target. Although OPEC’s influence has been challenged by the increase in oil production outside the organization, we shouldn’t start writing the cartel’s obituary just yet. Combined, OPEC members control nearly 80 percent of global crude reserves. Overall, national oil companies hold more than 90 percent of these reserves.

A New Strategy is Needed

Increased domestic oil production has been helpful but will not insulate us from the dangers of oil price volatility. What is needed to achieve real U.S. energy security is a comprehensive strategy that includes policies to expand production of petroleum while simultaneously focusing on breaking oil’s stranglehold over our nation’s transportation sector.

A strategy that combines both supply and demand-side policies is not only the right approach from a policy perspective, but it is also the most viable option in the current political environment. A bill that focuses solely on increasing oil and gas production will be vetoed, and any legislative initiative designed to only promote demand-side policies won’t see the light of day in either chamber of Congress.

How do we move the needle on increasing production while breaking oil’s control over the transportation sector? One path presents itself in a legislative proposal suggested by the members of the Energy Security Leadership Council, a group of retired high-ranking military leaders and CEOs of major oil-consuming companies who know a thing or two about national and economic security. Their plan includes the establishment of a fund to drive aggressive and smart investment in research and development of technologies focused on oil displacement in the transportation sector, such as low-cost, high-range batteries for electric cars and storage tanks for natural gas trucks.

The fund would be seeded with some of the revenues (bonus bids, rents, and production royalties) from oil and natural gas development in the Eastern Gulf of Mexico and any other federal lands and waters currently unavailable for development that are made available in the future. If production-related activities were obstructed, the Trust Fund would receive no money, and would therefore be unable to fund new research.

Every major piece of U.S. energy security legislation has been enacted in a moment of crisis, as a response to a spike in oil prices. Those who remember the 1973 Arab Oil Embargo may recall that widespread fuel shortages and skyrocketing prices led to the creation of the nation’s first-ever fuel-efficiency standards. Today, the picture is different. U.S. oil production is rising, consumption is flat, and petroleum prices and imports are dropping. We have an opportunity to invest in a more diverse transportation sector, using an abundance of domestically available fuels, and do so proactively from a position of great strength.

This opportunity must not be squandered. Opening new areas for production, developing new technologies, and bringing products to market take time. We have witnessed firsthand oil’s power over the American economy, and we must enact the necessary policies to shift our energy landscape away from oil without delay.

At a time of trust deficit between the two political parties, a real opportunity exists to enact supply- and demand-side legislation that both sides can get behind. The new Congress and the President should begin working on a deal to tackle one of the greatest national and economic security threats facing our nation today. If successful, the end result is a major win for all Americans, and for the future of our country.

Gene Gurevich is Director of Congressional Affairs at Securing America’s Future Energy.